June 11, 2015
Understanding and quantifying real estate risk is a fundamental skill needed to make smart development and investment decisions and properly advise commercial real estate clients. However, in today’s fluctuating real estate environment, assessing and mitigating risk is more challenging than ever.

Five major categories encompass the majority of real estate risk factors:

1) Economic risks – The most volatile and least controllable of all risk factors, economic risks include population, employment and income shifts, as well as supply and competition.
2) Liquidity risks – Commercial real estate is not typically a very liquid asset, requiring high transaction costs and long marketing and contract periods to convert to cash.
3) Political, legal and environmental risks – Local, state and federal regulations can add both positive and negative risks. Zoning, building codes, taxes, environmental and accessibility requirements can serve as market constraints, but incentives like property tax abatement and subsidies can promote development and investment.
4) Business risks – Individual management decisions regarding operations are risk factors that afford business owners and investors more control than the previous factors, but that still weigh heavily on an asset’s performance.
5) Financial risks – Business owners have a great deal of influence over financing and contract terms, particularly the amount of debt financing used to purchase a property. Increasing this rate directly affects volatility.